Subprime Car Business Booming

How’s that new car driving? If you don’t have a new car, you’re missing out. Auto sales are booming all over the U.S.A.

Today the major car companies released monthly sales figures, showing May was a barnburner. General Motors (GM) had its best month since 2008. Despite a bunch of recalls, GM sold 286,694 cars in May, up 13% from the same period last year.

“We’ve had a lot of pent-up demand from the first quarter that was pretty soft because of weather conditions,“ said Michelle Krebs, an analyst with researcher AutoTrader.com. “There’s no question there’s a correlation between housing starts and pickup sales.“

GM with its new pickups, Ford with SUVs and Chrysler with its Jeep brand were able to take advantage of a rising market buoyed by improved housing starts. The pace of U.S. home construction jumped in April to its highest level since November. Housing starts climbed 13.2 percent to a 1.07 million annualized rate following March’s 947,000 pace, the Commerce Department reported on May 16. Permits for future projects increased, a sign activity might accelerate in coming months.

Yes, construction workers need trucks to carry their tools and materials, but I still don’t see how this translates into such a boom in auto sales. I drive by construction sites every day, and I see few workers with brand new-trucks.

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The better answer, I suspect, is that companies like GM are boosting sales with easy financing. If you can breathe and have a regular paycheck, however small, they will find a way to sell you a car.

Car loans with seven-year terms are becoming more of the norm as consumers yearn for lower monthly payments.

That’s according to Experian Automotive’s latest State of the Automotive Finance Market report released Monday, which showed the average car loan term in the first quarter reached 66 months for the first time since the firm started publicly reporting data in 2006.

The analysis also showed that loans with terms extending out 73 to 84 months made up 24.9% of all new vehicle loans originated during the quarter, growing 27.6% since Q1 2013.

“As the cost of purchasing a new vehicle continues to rise, consumers clearly are stretching the loan term to help lower monthly payments, keeping them at a manageable level,“ said Melinda Zabritski, Experian Automotive’s senior director of automotive credit.

While the benefit of a longer-term loan is the lower monthly payment, Zabritski said the flip side of that is consumers can find themselves paying more in interest or being upside-down on their loan if they seek to trade their vehicle in early.

Last spring, several other indicators, including Experian’s, noted a growing trend in longer car loan terms, with some extending out as long as 97 months.

Meanwhile, the average amount financed for a new vehicle loan also reached an all-time high of $27,612 in Q1 2014, up $964 from the previous year, according to Experian.

Does this sound remarkably similar to the housing boom that collapsed so magnificently in 2008? Buying a car with a 97-month loan is just crazy for the consumer and maybe even the lender … but it’s great for the dealer and manufacturer.

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I think booming auto sales are a direct result of the Fed’s years of stimulus. The banks borrow money from depositors at practically zero, and then lend it to car buyers at 3%, 5%, 10% or even more. They make plenty of profit even if they have to repossess a few cars.

I actually did some research on this back in 2007-‘08, betting against the banks that make car loans like Capital One (COF), which saw great success during the crisis.

I found it was practically impossible for the banks and bondholders not to make money from their high interest rates and up-front fees when their own rates were low.

The picture changed when banks could no longer borrow so cheaply. Bank stocks and related instruments declined very quickly.

Will the same pattern repeat this time? I don’t know. I think there is a direct link between the unemployment rate and automotive loan defaults. If unemployment ticks up, people will start missing payments.

A lot depends on the banks’ own cost of funds. There’s a tipping point between default rates and interest rates. Once they hit it, watch out below!

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For now, millions of people are driving around in cars they really can’t afford. I’m not one of them. I still drive my 2007 Toyota Highlander and my wife loves her 2000 Lexus ES. We both like to drive our reasonably nice, paid-for cars and avoid payments as long as possible.

How about you? Anyone bought a new car lately and want to describe the experience? What loan terms did the dealer offer? Which banks were involved? Click here to send me your story.

I think there may be an investment opportunity here and maybe you can help me pinpoint it. I’ll share the feedback with all our afternoon edition readers soon.

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Markets were calm today ahead of the European Central Bank meeting Thursday and the U.S. employment report Friday. Here are some quick headlines…

The stock benchmarks stayed in the red all day, but managed to close well above their low points following an afternoon rally.

The losses would have been worse if Apple (AAPL) hadn’t rallied. Yesterday’s software announcements got generally good reviews today. The stock ended at $637.54, up 1.4%.

The 10-year Treasury yield ticked up a few basis points to 2.59%. Bond traders are still adapting to the Fed’s taper of QE3.

President Obama is headed for Europe for meetings with various officials. Thursday he’ll attend a D-Day commemoration event at Normandy beach in France. Vladimir Putin will also be there. We’ll see if they get any private time together.

I saw no reference to credit score in the report Subprime Car Business Booming by Brad Hoppmann on June 3, 2014 and borrowers who don’t have a higher credit scores (and in theory the ability to repay) can’t get these higher loans. The second point is cars are also lasting much longer now than they have in prior years.

Brad Hoppmann originally grew up in Florida, but has lived in Baltimore, Charlotte and New York as well throughout his career. Always an athlete, he played varsity football and water polo at the University of Florida and received All-SEC/SCC honors. →